5 of the Smart Money’s Brightest Utility Plays

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Financial news has focused on many sectors and themes over the past several years: big energy companies, commodities, a never ending attention on tech stocks, cloud computing, and even Buffett buying a railroad. One of the most unheralded stories over the same period has been the continual, nearly unbreakable, strength in the utility sector. Looking at a three-year chart of the Dow Jones Utility Index produces a nearly perfect low-to-high diagonal, paralleling the S&P 500’s move, but less susceptible to serious sell-off. Add in the high dividends received by shareholders of these stocks and shareholders have received a nifty risk/return scenario.

What may not be well appreciated is the degree to which the hedge fund community has soaked up utility shares. It’s always important to track the smart money’s sentiment; learn how retail investors have historically beaten the market using Insider Monkey’s strategies.

Below, we will take a quick look at five utilities to gain a better appreciation of hedge fund interest in these issues. The breadth of hedge funds taking the long side of the utility trade is impressive. Some funds appear across multiple issues while others take a single large position in one issue.  Whatever the specific strategy, the message appears clear: Many of the most elite hedge funds have a penchant for utility stocks.

As most investors understand, because of their high dividend yields utility stocks tend to trade with the bond market. Everything else being equal, a strong bond market and low bond yields attract investors into the sector. The conclusion here is a simple one: The hedge fund community believes in being on the right side of the low interest rate environment trade, and the continual, large scale buying in the utility space suggests they believe it will not be coming to an end anytime soon.

NorthWestern Corp (NYSE: NWE) provides electric and natural gas services to the U.S. states of Montana, South Dakota, and Nebraska. Currently, shares offer a dividend yield of 3.9%. Over the past 12 months Israel Englander’s Millennium Management (see Englander’s equity portfolio) fund built a position of 45,791 shares to 570,153 shares as of the latest fourth quarter 13F filing period. Adage Capital Management, meanwhile, initiated a 1 million-share position in the second half of 2012, and AQR Capital held an approximate 375K-share position throughout the period. NorthWestern is up more than 13% year-to-date, and Wall Street expects another 4-5% upside from current levels.

PG&E Corp (NYSE: PCG) is an electric and gas utility serving central and northern California; its dividend yields 4.2%. Levin Capital Partners held a 142,000 share position in its May 2012 filing. The most current filing unveiled a whopping 2.8 million share position—a massive boost for the firm managed by John A. Levin. D.E. Shaw grew a 349,000 share position reported in its Q1 2012 filing to 1.6 million shares by the end of 2012, and Stanley Drunkenmiller’s Duquesne Capital reported a new position of 619K shares in its current filing. PG&E has already popped close to 8% year-to-date, and trades below 14 times forward earnings, good for 20th lowest out of the 123-stock utilities sector.

American Electric Power Company (NYSE: AEP) is a well-known provider of electricity to a wide swath of central U.S. states, and the stock yields 4%. Per Insider Monkey’s 13F filing database, a solid group of buyers again appears: Adage Capital, Levin Capital, AQR, Millennium, Carlson Capital, Seminole Capital, and Renaissance Technologies, among others. The first five funds all reported minimum 1 million-plus share positions in their latest fourth quarter filings, and American Electric has already gained nearly 12% year-to-date.

Consolidated Edison (NYSE: ED) serves the greater New York City area and yields 4.2%. Once again, Renaissance Technologies, AQR, Millennium, DE Shaw, Citadel all appear as noteworthy shareholders, however, we must also mention David Harding’s Winton Capital Management. In its December filing, the fund revealed a 782K-share position, making Consolidated Edison its largest holding. In addition, Winton’s 13F shows large positions in Wisconsin Energy, Nextera Energy, and Southern Company, and ConEd has actually out-appreciated all but Wisconsin Energy since the start of 2013. Of this group, ConEd sports the second best dividend yield behind Southern (4.3%), and it has the cheapest valuation on a price-to-book basis (1.5x).

Duke Energy (NYSE: DUK) is well known as the blue chip utility. It provides utility services though numerous southern and central U.S. states; it currently yields 4.4%. As with the other issues discussed above, a long list of hedge fund buyers underlies shares of Duke. One particular fund to point out, using Duke to segue, is Duquesne Capital, which has committed a significant portion of its portfolio to utilities: Southern is 3.85% of the portfolio, Duke 2.0%, and the aforementioned PG&E 1.93%. Duke sports an even lower valuation than ConEd at 1.2 times book, and obviously the income is equally as impressive. It’s easy to see why hedgies are bullish, and we may have to coin the new term “Income at a Reasonable Price” for this stock.

General bullishness in this space is driven by one overarching factor, the current low interest rate environment, and it’s always important to track the smart money’s sentiment when considering any investment strategy.

This article is written by John Guba and edited by Jake Mann. InsiderMonkey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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